AFC Enterprises, Inc. (NASDAQ: AFCE), the franchisor and operator of
Popeyes® restaurants, announced the completion of a new, five-year $125
million revolving credit facility on December 18, 2013. At closing, the
stated...

AFC Enterprises, Inc. (NASDAQ: AFCE), the franchisor and operator of
Popeyes® restaurants, announced the completion of a new, five-year $125
million revolving credit facility on December 18, 2013. At closing, the
stated...

In a report published Tuesday, Jefferies analyst Alexander Slagle initiated coverage on AFC Enterprises (NASDAQ: AFCE) with a Buy rating and $47.00 price target.
In the report, Jefferies noted, AFC is one of the most appealing growth stories in...

By Investonomics:
In my attempt to bring impressive opportunities to my readers, today, I bring to you AFC Enterprises (AFCE). AFCE recently fell about 11% following the pessimistic growth guidance given by the management in its latest quarter...

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Business Overview

AFCE Enterprises operates and franchises Popeyes fast food restaurant domestically and internationally. Popeyes, the second largest quick-service chicken restaurant, is best known for their two divisions, Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen. AFC Enterprises has 38 company-operated restaurants and has franchised over 1,500 restaurants. There are Popeyes restaurants in 45 states and 26 foreign countries. Popeyes, originally founded in New Orleans, offers a menu including fried chicken, biscuits, and cajun seafood.

Previously, AFC Enterprises developed and franchised other major quick-service restaurants, such as Cinnabon and Seattle's Best Coffee. After coming under investigation for accounting scandals, AFC Enterprises sold off Seattle's Best Coffee to Starbucks in 2003 and Cinnabon to FOCUS Brands in 2004. The sale of these companies has allowed AFC Enterprises to shift focus to Popeyes and maximize the value of their porfolio.

Business Segment & Strategy

Franchise Restaurants

There are currently 1,542 franchise restaurants in the United States and 397 restaurants located internationally. Throughout the past decade, AFC Enterprises has experienced a strong growth of the number of franchise internationally with an increase of nearly 25% over the last 4 years. Despite growing at less than 1% a year, the domestic franchise sector has consistently recorded gains in the number of stores each of the past 5 years.

Contents

The franchise restaurant segment has been the dominant source of revenues to AFC Enterprises for the last decade. Franchise restaurants provide much less risk and limit costs. By providing franchisees with the right to run their own restaurant, AFC Enterprises is able to avoid operating costs, such as cost of goods, employees, and restaurant property. AFC Enterprises receives a majority of their revenues from franchises through royalty fees and development costs. Development and franchise fees are a one time payment associated with the opening of the restaurant. Royalty fees are the main source of revenues to AFC Enterprises as there is a 5% charge on net restaurant sales. Last year, Popeyes franchise restaurants recorded sales of $1.811 Billion. By receiving a 5% share of sales regardless of performance, AFC Enterprises is able to avoid the risk of restaurant failure and loss of investment.

Currently, the franchise restaurant segment is the main source of revenues to AFC Enterprises as this segment recorded 61% of revenues in 2010. In addition, this segment has shown consistent growth in revenues throughout the past 5 years, while the company-operated restaurants have continued to decline in revenues.

Company-Operated Restaurants

AFC Enterprise owns and operates 38 Popeyes restaurants within the United States. All company-owned stores are located in the southeastern area of the country, including Louisiana, Arkansas, Tennessee, and Mississippi. While the company-operated segment was a major source of revenues to AFC Enterprises in the past, the segment has recorded steadily declining numbers in revenue recently. This has not presented much of a problem as the there are so few stores and the franchise restaurant segment has seen steady increase in revenue over the past 5 years. While the company-operated restaurants represent only approximately 2% of Popeyes restaurants, its gives AFC Enterprises real insight as to how franchises across the country operate. Therefore, the main value of the company-operated restaurants is the knowledge gained from running the restaurant and also another way to diversify assets.

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Industry Analysis

Competition

Yum! Brands owns and franchises several major quick-service restaurants that compete for market share with AFC Enterprises, including Pizza Hut, KFC, and Taco Bell. Undoubtedly, Kentucky Fried Chicken (KFC) is the restaurant most frequently compared with Popeyes. These two restaurants hold almost all market share in the quick-service chicken restaurants. In addition, Yum! Brands also operates Long John Silver's, which would be one of the main competitors in the quick-service seafood restaurants.

Currently, there are 5,055 KFC restuarants in the United States and 11,978 restaurants internationally. KFC restaurants can be found in 110 countries around the globe and have a large market in China. Recently, Yum! Brands recorded revenues of $11,343 during the 2010 fiscal year. Over $3,000 of those revenues came from the market in China alone.

CKE Restaurants own and franchise Hardee's restaurants around the world. While Hardee's is known more for their burgers and breakfast, there are still chicken products offered on the menu. Previously, Hardee's marketed and sold fried chicken similar to what is offered at KFC and Popeyes. However, Hardees changed their vision and decided to restructure towards becoming a more of a quick-service burger restaurant.The remaining choices of chicken products are chicken tender baskets and chicken sandwiches.

As of 2010, there are 1,905 Hardee's restaurants still in operation. Similar to Popeyes, a majority of these restaurants are licensed and franchised out to investors. There are 475 company-owned restaurants and over 1,500 restaurants licensed and franchised.

McDonald's offers very limited chicken products when compared with the large size of their entire menu. However, McDonalds is a quick-service restaurant giant and a good comparison to a broader industry viewpoint. McDonald's is the largest quick-service burger restaurant and is recognized around the world. There currently are 32,737 restaurants in operation throughout 117 countries. 26,338 of these restaurants are licensed and franchised out. Despite being found originally in the United States, a majority of revenues come from Europe as this segment accounted fro 40% of total revenues in 2010. McDonald's offers numerous items but is known more as a quick-service burger restaurant. In the United States, McDonald's has captured a lot of market share through their brilliant marketing strategies, such as the "Dollar Menu" and Big Mac.

Financial and Operating Metrics

While AFC Enterprises is a much smaller corporation compared to competitors, there are still several financial statistics that offer positive future expectations. AFC Enterprises has a very strong Return on Assets (ROA) ratio and operating margin ratio. Despite having fewer assets than McDonalds and Yum! Brands, AFC Enterprises is able to get more out of the use of their assets and shows a much higher ROA than both competitors. In addition, AFC Enterprises has a very high Operating Margin compared to competitors. Therefore, AFC Enterprise is making more profit for each $1 of revenues.

AFC Enterprises has continued to show growth in revenues and number of stores over the past 5 years. While they are considered smaller than major competitors, there are still plenty of signs for a bright future.